Sunday, May 08, 2005

Progressivity v. Regressivity

In a previous post/rant, I took a editorial in the WSJ to task for citing an article in support of the proposition that federal income tax rates were becoming more progressive. In fact, the study cited by the WSJ made the point that income tax rates are becoming less, not more, progressive.

Via Brad DeLong, Alex Tabarrok of Marginal Revolution has a chart with this posting that shows fairly conclusively that while there is some progressivity in the federal tax system, the extent of progressivity is fairly choppy and, at certain points, marginal rates are actually regressive. (It is not clear whether the chart factors in FICA/SECA taxes, which are regressive. See the comments by Half Sigma.)

More significantly, I've been unable to find any current information on the progressivity/regressivity of the U.S. tax system as a whole. That is, a study that would factor in the effect of state and local taxes, as well as federal taxes. The only comprehensive study in this area was done several years ago by the late Joseph A. Pechman. I believe that the last year that was analyzed in the study was 1985. Pechman found that the distributional burden of the tax system as a whole was fairly flat since the progressivity of the federal tax was offset by the regressivity of state and local taxes.

If, as seems to be the case, federal taxes are becoming less progressive, it is likely that the U.S. tax system as a whole is actually becoming regressive, since there have been virtually no significant structural changes in state and local taxes in the last 20 years. In fact, to the extent that there have been no increases in state and local income taxes or income tax rates, state and local taxes may actually be more regressive than when Pechman conducted his study since any effective revenue increases at the state and local level have likely come from slightly regressive property taxes and highly regressive sales and excise taxes.